Strong Finish to 2006 Raises Expectations for Coming Year

16 February 2007

The construction industry finished 2006 on a positive note and expectations are high for sustained growth during 2007, according to the latest joint Trade Survey Report from the Construction Products Association and the Construction Confederation. However, high fuel and energy prices continue to hamper the industry’s overall performance, squeezing both product manufacturers’ and contractors’ margins and driving up tender prices.

The rise in output continues to be driven by robust commercial and industrial sector output combined with a modest rise in civil engineering work. Disappointingly though, the patchy delivery of key government programmes prevented even stronger industry growth during the final quarter of last year. Construction product manufacturers have enjoyed an overall rise in sales volumes, with growth continuing to be led by light side firms.  Heavy side firms’ sales have also improved, as companies are starting to benefit from an increase in civil engineering work.

Looking ahead the industry is expecting a further strengthening in construction activity during 2007, marked by stronger orders’ growth and rising demand. A modest pick up in public sector investment is expected to contribute to the rise, but higher private sector activity, in particular a strong commercial sector, will again be the main engine for industry growth. In addition, the pick-up anticipated for heavy materials’ demand is based on hopes of a recovery in infrastructure investment.   

Speaking about the latest report, Máren Baldauf, Economist of the Construction Products Association, said; ‘Construction activity continued to pick up during the fourth quarter thanks to higher commercial and industrial sector output and an improvement in civil engineering work. Strength in these areas helped offset a mixed performance in Government funded areas.  Unfortunately the overall positive outlook for product manufacturers is being tempered by continuing increases in fuel and energy costs, which are squeezing product manufacturers’ margins and is filtering through the supply chain as higher material prices. 
Stephen Ratcliffe, Chief Executive of the Construction Confederation said: “The positive end to the year was very welcome but the robust activity in the commercial and industrial sectors masks the rather mixed delivery of government programmes. Sustained public sector spending is key to delivering the planned programme of improvements in health, education and transport infrastructure as well as ensuring the confidence necessary for our industry to maintain its own investment in recruitment, training and long-term planning. It is important that the public sector maintains a continuous programme and does not revert to a stop-go approach.”

Key survey findings from the survey are:

• Contractors report fourth quarter output was ahead of a year ago, with 26% of firms on balance reporting that output was up on a year earlier.
• Overall construction product sales continued to strengthen during the fourth quarter with 29% of firms on balance reporting higher sales than a year ago.  On balance 38% of light side firms report that sales volumes were up, compared to last year. The tentative recovery in heavy side sales continued, with 24% of firms on balance reporting a rise in volumes. However, a significant proportion of all product manufacturers report a decrease in sales. 
• Products manufacturers expect buoyant market conditions over the next 12 months. On balance 92% of light side firms and 88% of heavy side firms anticipate higher sales volumes over the coming year.
• Civil Engineering contractors reported a further rise in total civil engineering workload, increased employment of operatives and staff, and order books fuller than a year ago.   
• Both heavy and light side products manufacturers continued to see widespread increases in fuel and energy costs, which they saw as the main drivers of their unit costs. 57% of all firms report that their unit costs rose by ‘more than 5%’. On balance, two-thirds of all firms surveyed indicate that unit costs were higher as a result of higher energy prices. The rise in unit costs continues to filter through to manufacturers’ selling prices.  Three quarters of all firms, on balance report that their selling prices had risen in the fourth quarter compared with a year earlier.
• Contractors report that their building costs continued to increase, with equal pressures from both labour costs and material prices.  However, tender prices rose only modestly.
• Contractors’ concern over labour availability increased. The availability of plumbers and carpenters worsened slightly. Repercussions of increased recruitment difficulties also rose, with a quarter of all contractors reporting that labour shortages had caused them to turn down work during the quarter.